General counsel's heightened influence in the boardroom

Over the past 15 years, the legal concerns and regulatory requirements of public company boards of directors have drawn general counsel into the highest echelons of senior management and made them key advisers to, and educators of, the board.

These heightened duties have changed what it means to be the general counsel of a public company (and of the private companies that emulate their board governance standards).

Many of the issues general counsel must manage today have become as important to a company’s success as its financial performance, and today’s general counsel have become as important to the board as the CFO, says Ben Heineman, former general counsel of GE and distinguished senior fellow at Harvard Law School’s Program on the Legal Profession.

“General counsel are responsible at the senior levels of not only asking the first question— is it legal?—but also the last question: Is it right?,” he says. “That means the skills that are required of them go far beyond being a technical lawyer. They have to be wise counselors and leaders. They can’t just hide in their offices and wait for someone to ask them a legal question, and then look in their Rolodex and call somebody.”

Instead, general counsel are now in the center of the action of the company because most of a company’s decisions now involve the kinds of issues that involve the essential skills of general counsel. At the same time, the quality of general counsel in the Fortune 100 and beyond has changed dramatically, Heineman says.

“If you look at the top of the profession now, you see White House counsel, judges from federal appeals courts, former attorneys general and senior partners in law firms,” he says. “The very best in the profession are becoming general counsel now. The chief lawyer is often [reported in proxy statements] among the top five highly compensated people in a company—that’s a reflection of the relative importance inside the company of that position.”

The importance of the issues GCs must manage today means their role has grown far beyond that of a legal clerk farming out work to outside firms.

“It’s just phenomenal the amount of legal exposure faced by directors and management today,” says Carrie Hightman, CLO for NiSource Inc. “It’s a different environment than it was 10 to 20 years ago. Because of that change, it’s more important than ever that the general counsel is knowledgeable and involved in what’s going on in the business.”

Rising Regulations

A number of forces have come together to bring about the sea change. First, at the turn of the century came the Enron era of accounting scandals, which drew attention to the importance of properly run, independent boards. The Sarbanes-Oxley Act of 2002 (SOX) and similar New York Stock Exchange (NYSE) rules followed.

SOX heightened disclosure requirements that would continue under the Dodd-Frank Wall Street Reform and Consumer Protection Act and significantly increased the role of the audit committee. It also imposed new rules on audit committee independence and governance, creating a new host of regulatory requirements for boards on which general counsel had to advise them.

At the same time, it mandated that corporate lawyers who became aware of a potential violation of the law had to take the matter to the board, making clear that the general counsel represents the overall entity, not management. That made the general counsel the “person on point,” says Bill Ide, former general counsel of Monsanto Co. and a partner at McKenna Long & Aldridge.

“It ups the ante of what lawyers have to do. If something happens, there’s a spotlight on the lawyers,” says Ide, pointing to Ann Baskins, who resigned as general counsel of Hewlett- Packard Co. after criticism of her role in the company’s spying scandal of 2006. “The buck stops with the general counsel, so that’s a lot of responsibility.”

Just as public companies were becoming comfortable with SOX, along came the 2008 financial crisis and the 2010 enactment of Dodd-Frank. Dodd-Frank built upon SOX’s corporate governance reforms. In addition to its numerous industryspecific regulations, Dodd-Frank placed new requirements on compensation committees, fine-tuned the role of governance committees and provided a whistleblower program that allowed employees who spot wrongdoing to report directly to the government—on all of which the general counsel must now advise the board.

This series of major regulatory developments has made government relations both increasingly important and complicated, to the extent that now the general counsel tends to handle such issues more, says Susan Webster, who leads Cravath, Swaine & Moore’s General Corporate practice. In the past, a corporation’s Washington, D.C., office might have taken the lead in government relations, but that is changing.

“As a result of the significant number of new regulations and increased regulatory scrutiny, what we’re seeing now is that in a number of companies, government relations is becoming the responsibility of the general counsel,” Webster says. “The general counsel is the person who is talking about these issues at the board level.”

Changing Tides

Beyond regulatory scrutiny, general counsel must guide boards through the added pressure of increasing shareholder activism and the rise of the Institutional Shareholder Services (ISS), which has aided and emboldened shareholders.

“Ten to 15 years ago, it wasn’t uncommon for a shareholder proposal to get, at best, a couple percentage points of the vote at a meeting,” says Patrick Quick, a partner at Foley & Lardner. “These days, through a combination of a better choice of proposals and an increase in the respect and stature of these activists, it’s more and more common for these shareholder proposals to pass. In that sense, the tide is turning.”

Because the general counsel tends to be the chief minder of governance practices and is involved with the governance committee, and many shareholder proposals are governance-related, Quick says the general counsel typically helps the governance committee understand the proposal, interfacing with the proponents of the proposal and potentially negotiating with the proponent for withdrawal of or changes to the proposal.

General counsel often sit in on direct communications between shareholders and board directors to stay in compliance with Regulation Fair Disclosure (FD), the 2000 Securities and Exchange Commission (SEC) rule that prohibited directors from disclosing material nonpublic information to one shareholder (say, a major institutional shareholder) and not to another.

“There’s a lot of protocol around [those communications], and the general counsel is extremely important in sorting out these matters,” says Alexandra Lajoux, chief knowledge officer of the National Association of Corporate Directors.

Another area of concern to the board is the significant increase in recent years in the SEC’s enforcement of the Foreign Corrupt Practices Act (FCPA) and similar statutes, particularly the U.K.’s Bribery Act.

“Companies are very focused on trying to put programs in place that will mitigate the FCPA risk. This is something the general counsel takes on that holds a great deal of importance to board members,” Webster says. “It’s all about managing risk and, in particular, the reputational risk.”

As boards and general counsel deal with this confluence of issues, they do so in the harsh glare of the public eye thanks to the 24-hour news cycle and the Internet.

“Today the public is much more directly involved in the scrutiny of everything a company does, and that just wasn’t true 15 years ago,” Ide says. “Companies were much more insular. A general counsel’s work was about litigation and contracts, and not as much about shareholders asking about executive pay, regulators asking whether you have a compliance program in place and the FCPA abroad.”

Risk Report

Because the general counsel’s role has evolved to become a true part of the senior business team, it is on this basis that the GC works with the board. A good example is the general counsel’s role in the focus of senior management and the board on enterprise risk management. It’s a focus that grew out of the financial crisis, both as a business imperative but also because of 2009 SEC proxy disclosure enhancements that require companies to disclose how their boards oversee risk.

“Enterprise risk management became a very natural place for the general counsel to step up … and one of the biggest issues for general counsel working with their boards today,” Webster says.

They’re working with senior management to identify, evaluate and communicate risks to the board, creating a process that helps the board set its risk tolerance levels, and then monitoring them going forward.

Webster says, “One of the things I’ve heard from GCs is that part of their role is helping to facilitate a consensus on the limits of the risk the business is going to take: What are the risks we are going to take, how are we going to measure them, and how are we going to measure our success in connection with those risks?”

Bob Scott, general counsel of TE Connectivity Ltd., attends every meeting of his board, where time is allotted on every agenda for Scott to update board members on what he sees as the key risks the company is facing.

“Really the most important thing a board can do is to have an understanding and oversight of risk,” he says.

To prepare this report, Scott looks to new legislation, new regulations or legal updates occurring around the world to gauge what risks the company is facing and what the board should know about, and he does so independently, rarely giving TE’s CEO or chairman a preview. He often picks three issues to raise at each meeting, along with updates on his previous reports. Scott has found that many other general counsel lack such a regular pattern of discussing risk with their board, but it’s a practice he recommends.

“By being very open and transparent with the board about how we view these risks and how we’re impacted by them, they don’t get surprised or overexcited by issues, because they know they’re going to regularly hear about them,” Scott says. “There’s a lot of trust that you’re going to tell them about these issues. Without surprises, they can act in a calm manner with us as we try to explain how we can mitigate these risks.”

Heineman says it’s important to keep such an open dialogue on risk and priorities instead of the general counsel making one recommendation. He advises being very clear about the tradeoffs and issues at stake in any particular decision.

“General counsel should be as honest as they can be about the uncertainties and how the decision can go wrong just as the decision can go right,” he says. “They should be as honest as they can be about that so they can generate a good discussion with the board on the real issues in any particular decision the board’s making so the board understands it reasonably well. What general counsel owe to the board is honesty, candor and fairness in the way that they present the issues.”

Constant Presence

Scott is not the only general counsel becoming a regular presence in the boardroom.

“General counsel are in the room much more frequently for committee and board meetings, whereas in the past, they may not have been in as many discussions,” Webster says. “Their involvement is broader, and the dynamic has changed: It’s a constant dynamic process, and there’s less reporting on the latest isolated law.”

The general counsel also maintains heightened contact with the board outside the boardroom.

Before SOX kicked off the changes that would enhance the GC’s role in the boardroom, the general counsel wouldn’t have thought of developing a relationship with a particular board member without the CEO as a conduit, says Stasia Kelly. A partner at DLA Piper, Kelly has served as general counsel at AIG, MCI/Worldcom and Sears, Roebuck and Co. In fact, Kelly says that back then, the CEO controlled contact between the board and any member of senior management.

Things have changed. Director relationships have always been vital in the group dynamics of a board, and now the same relationships form between the general counsel and members of the board and its committees, certainly with the chairman/ presiding director and the head of the audit committee.

Today, “the best general counsel are the ones that have those great relationships with each board member,” says Maureen Errity, director of Deloitte’s Center of Corporate Governance. “They know their board well, and they’re constantly interacting with board members.”

Over the past 15 years, a healthy new dynamic has developed and taken hold. Both CEOs and general counsel have come to recognize that a direct line of communication between the GC and the board is a good thing; at the same time, the board has come to want the opportunity to communicate directly with the GC outside the boardroom setting.

Because the GC’s role is to inform the board, open communication is critical.

“I sit on two public boards, and if I thought my access to the general counsel was being controlled or discouraged by the CEO, that would raise serious flags for me in a way it would not have 15 years ago,” Kelly says. “Those direct lines of communication not only give the directors more insight into issues the company faces, but also give the general counsel the ability to discuss issues with directors in a way that is very helpful and productive. … There’s better transparency, better communication and better information—I don’t see a downside."